LIGHTHOUSE CONTRARIAN FUND
ANNUAL REPORT
August 31, 1998
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
September 30, 1998
Dear Shareholder,
Performance
The Lighthouse Contrarian Fund began on September 29, 1995, with an NAV of
$12.00 and closed on August 31, 1998
at $10.85. A capital gains distribution of $0.61 was paid on December 15, 1997,
bringing the total capital gain distribution since inception to $0.94. The
annualized total return from inception through August 31, 1998 was -1.34%. The
average annual total return for the 12 month period ended September 30, 1998 and
from inception through September 30, 1998, was -26.77% and 1.60%, respectively.
Economic Booms - Real or Artificial?
"Never confuse an economic miracle with a liquidity bubble", advises James
Stack, editor of InvestTech Research. How can investors tell the difference?
True economic miracles require a general embracing of capitalism: unregulated
markets, free trade, limited government, and sound money (backed by gold). The
United States and England chose this path during the 19th century resulting in
the greatest improvement in living standards the world has seen. Unfortunately,
the 20th century has reversed this trend as the world's economies (including the
U.S.) moved towards a model of heavy government intervention: high taxes,
regulations, social and corporate welfare, trade subsidies and protections, and
fiat currencies.
Temporary economic booms (liquidity bubbles), on the other hand, are
characterized by 1) a general lack of free market reforms (despite rhetoric to
the contrary) and 2) a dependence on monetary "stimulus" to grow the economy.
Stimulus is provided through the central bank and banking system in the form of
artificially low interest rates and easily available credit.
Liquidity-fueled booms are destructive in nature. Any number of sins are
committed during the good times: over-leverage, excessive risk taking, public
speculation, over-investment, abundant foreign investment, and conspicuous
consumption. The general mood of investors, bankers, businessmen, politicians,
and consumers becomes one of optimism and complacency. If the party goes on long
enough, sentiment turns into euphoria, arrogance, and hubris. Lessons of
previous downturns are forgotten. Rationalizations abound for why past business
cycle rules no longer apply.
The inevitable bust is the constructive phase of the business cycle as the
market removes the excesses of the previous boom. Credit contracts and tightens,
overcapacity is shuttered, overextended businesses go bankrupt, and reckless
lenders fail. Any attempt by government to stimulate the economy or mitigate the
losses of investors and bankers only delays this cleansing process and prolongs
the crisis. Anti-capitalist measures, such as raising taxes and erecting trade
barriers (as the U.S. tried during the 1930s) lead to disaster.
Late 1980s Japanese Miracle
During the late 1980s, most people in this country were in awe of Japan, Inc. It
was widely believed that American technology would not be able to compete with
the Japanese model in which bureaucrats directed the economy and targeted U.S.
industries for extinction.
At the time, we took the contrary position that Japan was a massive speculative
bubble fueled by easy credit. Our May, 1990 report to clients documented the
excesses:
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LIGHTHOUSE CONTRARIAN FUND
"The first three months of this new decade marked the beginning of the end of
one of the greatest speculative manias in history: Japan. At the height of
lunacy, the Japanese stock market accounted for 60% of the global stock market
even though Japan's economic output was less than 15% of the world. Japanese
real estate nearly doubled the value of real estate in the U.S., even though
Japan is about the size of Montana. Speculative excesses reached historic
proportions: million dollar golf club memberships, 100-year mortgages, record
prices paid for impressionist art, and an insatiable appetite for gold,
diamonds, BMWs, and other luxuries."
When the bubble burst in the early 1990s, Japan made several mistakes. The worst
was propping up their banking system with lower interest rates. This allowed
banks to continue making bad loans, fuel the Southeast Asian bubble of the
mid-1990s, and funnel money into the U.S. government bond market (helping fuel
our bubble). In addition, Japan's politicians failed to cut government spending
and last year actually raised taxes. Today, stock prices are hitting 12-year
lows, the economy is depressed, and the banking system is in shambles.
Late 1990s U.S. Economic Boom - New Economy or Speculative Bubble?
The business expansion in this country is an unprecedented eight years old. We
continue to feel this is a liquidity bubble for two reasons. First, the U.S. has
avoided free market reforms. In fact, government spending, taxation, and
regulations are all higher than when the expansion started. Two "free trade"
agreements, NAFTA and GATT were signed, but these only added mountains of red
tape to international trade. Second, this boom has been fueled by easy credit:
credit card borrowing, home equity lending, margin buying, hedge fund
leveraging, and foreigners buying our government debt.
A global credit crunch started a year ago and a U.S. stock market correction is
now two months old and counting. How much more damage must be done to weed out
the excesses of the 1990s boom? We believe there is much more pain to come
because 1) the excesses of the past boom were so great and 2) a pattern of
government bailouts encouraged excessive risk taking.
Magnitude of Excesses
An examination of the excesses of the late 1990s boom, as illustrated by
excerpts from past shareholder letters, reveals the magnitude of the problem:
"Individual investors are speculating (knowingly) in hot new issues and
(unknowingly) through mutual funds. High-tech IPOs are commanding absurd
valuations, with some creating overnight paper billionaires. Individuals are
pouring money into aggressive growth funds run by young guns who have never
witnessed a correction." - March 31, 1996
"A recent trip to the local Barnes & Noble revealed [an] upbeat investment
climate. Doom-and-gloom is out and do-it-yourself wealth
is in." - September 30, 1997
"Mergers and acquisitions are soaring. For example, commercial banks are in a
feeding frenzy to buy investment banks, paying an unprecedented five to seven
times book value." - September 30, 1997
"Booms hide a multitude of sins and banks have committed their share this
cycle." - March 31, 1998
"In hindsight, it appears the "Asian Miracle" was artificially supported by
years of easy credit, loan guarantees, government subsidies and protections." -
March 31, 1998
"The Internet frenzy is the epitome of speculative excess in this market.
Although Yahoo! is widely touted as the next great media company, the stock's
valuation assumes this is a foregone conclusion. Yahoo!'s $9.1 billion market
capitalization exceeds The New York Times at $5.9 billion, The Washington Post
at $5.4 billion, and Dow Jones & Co. at $4.9 billion. It even rivals the $24.2
billion price tag on CBS." - August 4, 1998
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"Asset bubbles are usually fueled by easy credit and this one is no exception.
Banks have been aggressive lenders at the end of this business expansion, which
has finally attracted the attention of the Federal Reserve. The next recession
will no doubt expose plenty of bad loans that were made during these good
times." - August 4, 1998
"Do we, in fact, live in a new era in which the business cycle has been
repealed, mega-mergers actually work, investment gurus maintain elevated status,
inflation is dead, ever-rising capital gains tax revenues produce budget
surpluses, and every global mishap is quickly cleaned up by a government
bailout? Do valuations no longer matter because there is always another baby
boomer to buy stock at higher prices? We continue to offer a dissenting voice."
- - August 4, 1998
Excessive Risk Taking - Moral Hazard
One of the hallmarks of the global expansion of the 1990s has been the use of
government bailouts to limit the losses of investors and bankers. This has
created a moral hazard in which excessive risk taking has been enabled (and
encouraged) by government actions:
1990 - Several savings & loans failed due to reckless real estate lending,
encouraged by a system of deposit insurance. Under the protection of government
guarantees, depositors had poured money into the highest yielding jumbo CDs.
These, of course, were offered by the S&Ls taking the greatest risks. In effect,
they were given a free ticket to gamble with depositors' money: heads they won,
tails the taxpayer lost.
1991 - A mild recession hit the banking sector especially hard. The Federal
Reserve aggressively lowered interest rates in order to bail out the banks. It
worked, but not enough banks were allowed to fail.
Early 1990s - Japan's stock market bubble, caused in large part by easy credit,
burst. Banks were a mess, but not allowed to fail. The Bank of Japan tried to
shore up the banking system and stimulate the economy by slashing interest
rates. Instead, through the banks, money poured into Southeast Asia and the U.S.
government bond market.
1994 - The Latin America emerging markets bubble burst. Spearheaded by Treasury
Secretary Robert Rubin, the U.S. bailed out Mexico. Relieved, speculators moved
on to other emerging markets in Southeast Asia and Russia.
1995-96 - Southeast Asian markets boomed as foreign investment poured in. Easy
credit added fuel to the fire as the money supply in many of these countries
grew in excess of 20%.
1996-97 - The Russian stock market was the strongest in the world two years
running. Foreign investors, enticed by the opportunity to get in on the ground
floor of the next capitalist revolution, overlooked a general lack of real free
market reforms.
1997 - The Southeast Asian bubble burst taking several currencies with it.
Japan's economy was in the worst shape since World War II and bankruptcies
reached records. The U.S., seen as a safe haven, remained unscathed. The IMF
poured billions into Malaysia, Indonesia, and Korea, making matters worse.
1998 - Russia imploded, effectively defaulting on its government debt. Several
hedge funds were hit especially hard, forcing them to liquidate other holdings.
European banks, led by Germany, had the greatest exposure. In Germany, over half
of the loans to Russia were backed by government guarantees.
1998 - After leveraging well over $100 billion in investments on $4 billion in
equity, hedge fund Long-Term Capital was not able to meet margin requirements
without wholesale liquidation, which was feared could put further pressure on
world financial markets. The New York Federal Reserve orchestrated a $3.65
billion bailout by 14 of its largest creditors; among them Merrill Lynch,
PaineWebber, Goldman Sachs, Travelers, and Union Bank of Switzerland.
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LIGHTHOUSE CONTRARIAN FUND
What is the Solution? The solution is simple but painful: enact true free market
reforms and allow the market to remove the excesses of the past liquidity boom.
Banks and businesses must be allowed to fail, and government intervention must
be kept to a minimum. Unfortunately, politicians, businessmen, and economists
will call for lower interest rates (i.e. easier credit) and more IMF bailouts -
even though these caused the mess in the first place. This will only make
matters worse, deepen the crisis, and prolong the agony.
Predictably, Federal Reserve Chairman, Alan Greenspan, recently lowered the Fed
funds rate by 1/4%. In the short run, this will only serve to give bankers and
investors a false sense of security. In the long run, it will slow down the
process of weeding out excesses, especially in the banking system.
Investment Strategy
We continue to feel we are in the early stages of a credit contraction that will
deflate the speculative bubble in our stock market. The contrarian philosophy
excels at major turning points and the Lighthouse Contrarian Fund is well
positioned to take advantage of this significant turn of events.
Our strategy includes maintaining short positions in commercial and investment
banks that extended the credit to fuel this boom, such as Citicorp, BankAmerica,
and Merrill Lynch. In addition, large multinational companies that benefited
from an over-stimulated global economy are vulnerable. Coca Cola is a good
example, getting 75% of its profits overseas. We are also short technology
companies that have benefited from a period of over-investment. These include
high-tech darlings Dell Computer, Intel and Microsoft whose sky-high valuations
fail to reflect any slowdown in capital spending.
Gold continues to offer an excellent hedge against weakening currencies
(including the U.S. dollar), a deteriorating financial system, and political
uncertainties. It is no coincidence that gold recently hit an 18-year low while
confidence in our central bank is at an all-time high. We expect their positions
to reverse. The tobacco industry is another way to play the fall of the
political establishment. Any discrediting of the current government will take
political pressure off this industry. Value-oriented retailers should also do
relatively well in a more cost-conscious consumer environment.
Thank you for your patience and support.
/s/
Kevin P. Duffy
Portfolio Manager
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LIGHTHOUSE CONTRARIAN FUND
Value of $10,000 vs. the S&P 500
Average Annual Total Return
Period Ended August 31, 1998
1 Year..................... -28.46%
Since Inception (9/29/95).. -1.34%
Date Fund S&P
9/29/95 10,000 10,000
12/31/95 10,068 10,599
3/31/96 10,822 11,170
6/30/96 11,392 11,663
9/30/96 11,300 12,029
12/31/96 12,970 13,035
3/31/97 12,210 13,381
6/30/97 12,841 15,712
9/30/97 14,324 16,891
12/31/97 13,813 17,382
3/31/98 13,830 19,805
6/30/98 12,678 20,447
8/31/98 9,613 17,313
Past performance is not predictive of future performance.
The S&P 500 is a broad market-weighted average of U.S. blue-chip companies.
The index is unmanaged and returns include reinvested dividends.
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LIGHTHOUSE CONTRARIAN FUND
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS at August 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Shares COMMON STOCKS: 62.6% Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Goods: 0.6%
<S> <C> <C> <C>
10,000 3D Systems Corp.*....................................................... $ 58,750
12,000 Huntco, Inc., Class A................................................... 82,500
------
141,250
-------
Consumer Goods - Apparel: 6.5%
8,000 Jones Apparel Group, Inc.*.............................................. 155,000
36,000 Norton McNaughton, Inc.*................................................ 163,125
13,000 Oshkosh B'Gosh, Inc., Class A........................................... 474,500
45,000 Quiksilver, Inc.*....................................................... 618,750
-------
1,411,375
---------
Consumer Goods - Consumer Products: 2.2%
16,000 Fossil, Inc.*........................................................... 264,000
6,000 Helen of Troy Ltd.*..................................................... 104,250
10,700 Polk Audio, Inc.*....................................................... 117,700
-------
485,950
-------
Consumer Goods - Food Producers: 0.2%
20,000 The UniMark Group, Inc.*................................................ 47,500
------
Consumer Goods - Restaurants: 0.3%
8,000 Lone Star Steakhouse and Saloon, Inc.*.................................. 68,000
------
Consumer Goods - Retail, Apparel: 1.4%
15,000 Paul Harris Stores, Inc.*............................................... 97,500
10,000 Talbots, Inc............................................................ 210,625
-------
308,125
-------
Consumer Goods - Retail, Mail Order: 3.4%
36,000 Lands' End, Inc.*....................................................... 738,000
-------
Consumer Goods - Retail, Specialty: 6.9%
18,000 Claire's Stores, Inc.................................................... 270,000
60,000 The Good Guys, Inc.*.................................................... 420,000
71,000 REX Stores Corp.*....................................................... 727,750
5,000 Toys "R" Us, Inc.*...................................................... 92,813
------
1,510,563
---------
See accompanying Notes to Financial Statements.
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LIGHTHOUSE CONTRARIAN FUND
SCHEDULE OF INVESTMENTS at August 31, 1998, Continued
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer Goods - Tobacco: 1.4%
2,400 Philip Morris Companies, Inc............................................ $ 99,750
9,000 RJR Nabisco Holdings Corp............................................... 195,188
-------
294,938
-------
Energy - Oil Drilling: 0.5%
4,500 Transocean Offshore, Inc................................................ 110,531
-------
Energy - Oil, Secondary: 13.6%
14,000 Anadarko Petroleum Corp................................................. 402,500
21,000 Barrett Resources Corp.*................................................ 426,563
40,000 Basin Exploration, Inc.*................................................ 365,000
13,000 Benton Oil and Gas Company*............................................. 64,187
25,000 Key Production Company, Inc.*........................................... 150,000
34,000 Nuevo Energy Company*................................................... 554,625
23,400 Ocean Energy, Inc.*..................................................... 207,675
28,000 Plains Resources, Inc.*................................................. 430,500
20,000 Pogo Producing Company.................................................. 238,750
14,000 Vintage Petroleum, Inc.................................................. 109,375
-------
2,949,175
---------
Energy - Oilfield Services: 0.7%
8,100 Baker Hughes, Inc....................................................... 147,825
-------
Energy - Seismic: 0.7%
27,000 Mitcham Industries, Inc.*............................................... 145,125
-------
Health Care - Biotechnology: 0.6%
60,000 Xoma Corp.*............................................................. 123,750
-------
Health Care - Pharmaceuticals: 3.5
50,000 ICN Pharmaceuticals, Inc................................................ 768,750
-------
Precious Metals - Gold Mining: 8.2%
75,000 Agnico Eagle Mines, Ltd................................................. 206,250
48,000 Barrick Gold Corp....................................................... 624,000
37,000 Crown Resources Corp.*.................................................. 101,750
See accompanying Notes to Financial Statements.
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LIGHTHOUSE CONTRARIAN FUND
SCHEDULE OF INVESTMENTS at August 31, 1998, Continued
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
Precious Metals - Gold Mining, continued
7,500 Getchell Gold Corp.*.................................................... $ 67,500
57,000 Newmont Mining Corp..................................................... 780,188
-------
1,779,688
---------
Technology - Communications: 0.2%
13,000 Vtel Corp.*............................................................. 44,687
------
Technology - Computers: 1.0%
5,400 Sun Microsystems, Inc.*................................................. 213,975
-------
Technology - Semiconductors: 2.0%
3,000 QLogic Corp.*........................................................... 142,125
17,000 SDL, Inc.*.............................................................. 289,000
-------
431,125
-------
Technology - Software: 7.0%
50,000 Informix Corp.*......................................................... 175,000
75,000 Progress Software Corp.*................................................ 1,354,687
---------
1,529,687
---------
Transportation - Truck: 1.7%
31,800 American Freightways Corp.*............................................. 238,377
4,000 CNF Transportation, Inc................................................. 125,000
-------
363,377
-------
Total Common Stocks (cost $17,391,480).................................. 13,613,396
----------
CLOSED-END FUNDS - INTERNATIONAL: 1.4%
- ------------------------------------------------------------------------------------------------------------------------------------
19,000 Argentina Fund, Inc..................................................... 148,437
16,000 Chile Fund, Inc......................................................... 153,000
-------
Total Closed-End Funds (cost $604,221).................................. 301,437
-------
See accompanying Notes to Financial Statements.
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
SCHEDULE OF INVESTMENTS at August 31, 1998, Continued
- -----------------------------------------------------------------------------------------------------------------------------------
Principal Amount Market Value
REPURCHASE AGREEMENT: 7.2%
- -----------------------------------------------------------------------------------------------------------------------------------
$1,563,000 Star Bank Repurchase Agreement, 4.9%, dated 8/31/1998,
due 9/1/1998, collateralized by $1,565,000 GNMA 5.5%,
due 3/20/2022 (proceeds $1,563,213) (cost $1,563,000)................... $ 1,563,000
-----------
Total Investment in Securities (cost $19,558,701+): 71.2%............... 15,477,833
----------
LONG EQUITY OPTIONS: 3.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Contracts Common Stocks / Expiration Date / Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
40 Banc One Corp. / November 65 Puts*...................................... 110,000
50 BankAmerica Corp. / October 90 Puts*.................................... 125,625
40 Clear Channel Communications, Inc. / January 45 Puts*................... 22,750
110 Coca-Cola Company / November 85 Puts*................................... 217,250
110 First Union Corp. / January 60 Puts*.................................... 127,875
70 Intel Corp. / October 80 Puts*.......................................... 73,500
40 NationsBank Corp. / November 80 Puts*................................... 95,000
------
Total Long Equity Options (cost $391,196)............................... 772,000
-------
LONG INDEX OPTIONS: 8.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Contracts Index / Expiration Date / Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
5 NASDAQ 100 Index / September 1380 Puts*................................. 112,187
9 Russell 2000 Index / December 430 Puts*................................. 78,863
60 S&P 500 Index / December 1150 Puts*..................................... 1,120,500
160 S&P 500 Index LEAP / December 1999 105 Puts*............................ 240,000
20 Semiconductor Index / September 300 Puts*............................... 215,000
-------
Total Long Index Options (cost $681,691)................................ 1,766,550
---------
Total Put Options Purchased (cost $1,072,887): 11.7%.................... 2,538,550
Other Assets less Liabilities: 17.1%.................................... 3,726,808
---------
Total Net Assets: 100.0% ............................................... $21,743,191
-----------
See accompanying Notes to Financial Statements.
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LIGHTHOUSE CONTRARIAN FUND
SCHEDULE OF INVESTMENTS at August 31, 1998, Continued
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITIES SOLD SHORT at August 31, 1998: (27.8%)
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Common Stocks Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
Financial - Banks: (8.3%)
9,000 Banc One Corp........................................................... $ 342,000
7,800 Citicorp................................................................ 843,375
5,000 NationsBank Corp........................................................ 285,000
14,000 Silicon Valley Bancshares*.............................................. 342,125
-------
1,812,500
---------
Financial - Brokerage Firms: (2.4%)
8,000 Merrill Lynch and Company, Inc.......................................... 528,000
-------
Services - Media: (1.0%)
5,000 Clear Channel Communications, Inc.*..................................... 225,000
-------
Technology - Computers: (3.3%)
15,000 Gateway, Inc.*.......................................................... 709,688
-------
Technology - Internet: (5.1%)
16,000 Yahoo!, Inc.*........................................................... 1,104,000
---------
Technology - Semiconductors: (1.7%)
16,500 Micron Technology, Inc.*................................................ 375,375
-------
Technology - Semiconductor Equipment: (2.0%)
17,500 Applied Materials, Inc.*................................................ 429,844
-------
Technology - Software: (4.0%)
9,000 Microsoft Corp.*........................................................ 863,437
-------
Total Common Stocks Sold Short (proceeds $4,855,638).................... $ 6,047,844
===========
<FN>
*Non-income producing security.
See accompanying Notes to Financial Statements.
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LIGHTHOUSE CONTRARIAN FUND
SCHEDULE OF INVESTMENTS at August 31, 1998, Continued
- ------------------------------------------------------------------------------------------------------------------------------------
+At August 31, 1998, the cost of the securities for Federal tax purposes was
the same as the basis for financial reporting. Unrealized appreciation and
depreciation of securities were as follows:
Gross unrealized appreciation........................................... $ 3,650,050
Gross unrealized depreciation........................................... (7,457,461)
----------
Net unrealized depreciation....................................... $ (3,807,411)
============
</FN>
</TABLE>
See accompanying Notes to Financial Statements.
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LIGHTHOUSE CONTRARIAN FUND
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES at August 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C>
Investments in securities, at value (cost $19,558,701)................................. $15,477,833
Put options purchased (cost $1,072,887)................................................ 2,538,550
Cash................................................................................... 412
Deposits with brokers for securities sold short........................................ 9,177,949
Receivables:
Investment securities sold....................................................... 555,172
Dividends and interest .......................................................... 41,031
Deferred organization costs............................................................ 13,924
Prepaid expenses....................................................................... 35,093
------
Total assets .............................................................. 27,839,964
----------
LIABILITIES
Securities sold short, at value (proceeds $4,855,638).................................. 6,047,844
Payables:
Advisory fees.................................................................... 12,490
Administration fee............................................................... 3,265
Distribution fees................................................................ 10,470
Fund shares redeemed............................................................. 1,703
Accrued audit fees..................................................................... 15,064
Accrued expenses ...................................................................... 5,937
-----
Total liabilities.......................................................... 6,096,773
---------
NET ASSETS ................................................................................. $21,743,191
===========
Net asset value, offering price and redemption price per share
($21,743,191/2,003,127 shares outstanding;
unlimited number of shares authorized without par value) .............................. $10.85
======
COMPONENTS OF NET ASSETS
Paid-in capital ....................................................................... $27,533,030
Accumulated net investment loss........................................................ (39,508)
Accumulated net realized loss on investments........................................... (1,942,920)
Net unrealized depreciation on investments............................................. (3,807,411)
----------
Net assets ................................................................ $21,743,191
===========
</TABLE>
See accompanying Notes to Financial Statements.
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<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS - For the Year Ended August 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Income
<S> <C>
Interest......................................................................... $ 570,751
Dividends........................................................................ 139,224
-------
Total income............................................................... 709,975
-------
Expenses
Advisory fees.................................................................... 398,634
Distribution fees................................................................ 79,726
Administration fee .............................................................. 63,781
Registration fees................................................................ 29,958
Fund accounting fees............................................................. 23,457
Legal fees....................................................................... 16,933
Transfer agent fees.............................................................. 14,070
Audit fee........................................................................ 13,429
Custody fees..................................................................... 12,328
Trustee fees..................................................................... 6,927
Reports to shareholders.......................................................... 6,675
Amortization of deferred organization costs...................................... 6,672
Miscellaneous.................................................................... 4,401
Insurance........................................................................ 2,287
-----
Total expenses............................................................. 679,278
Less: expenses reimbursed.................................................. (41,466)
Add: dividends paid on short sales ........................................ 48,250
-------
Net expenses............................................................... 686,062
-------
Net investment income ............................................... 23,913
------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain from security transactions..................................... 2,686,781
Net realized loss from short sale transactions................................... (2,992,648)
Net realized loss on put options purchased....................................... (1,378,054)
Net change in unrealized appreciation on investments............................. (7,371,821)
----------
Net realized and unrealized loss on investments............................ (9,055,742)
----------
Net decrease in net assets resulting from operations ................ $ (9,031,829)
============
</TABLE>
See accompanying Notes to Financial Statements.
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<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
Year Year
Ended Ended
August 31, 1998 August 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM:
OPERATIONS
<S> <C> <C>
Net investment income..................................................... $ 23,913 $ 25,237
Net realized gain from security transactions.............................. 2,686,781 1,422,317
Net realized (loss) gain from short sale transactions..................... (2,992,648) 669,699
Net realized loss on put options purchased................................ (1,378,054) (952,617)
Net change in unrealized appreciation on investments..................... (7,371,821) 2,609,095
---------- ---------
Net (decrease) increase in net assets resulting from operations ....... (9,031,829) 3,773,731
---------- ---------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net realized gain from security transactions.............................. (1,274,545) (315,958)
---------- --------
CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived from net change in outstanding shares (a) 1,585,523 13,041,844
--------- ----------
Total (decrease) increase in net assets ............................... (8,720,851) 16,499,617
NET ASSETS
Beginning of year........................................................ 30,464,042 13,964,425
---------- ----------
End of year ................................................................. $21,743,191 $30,464,042
=========== ===========
<FN>
(a) A summary of capital shares transactions is as follows:
Year Year
Ended Ended
August 31, 1998 August 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Value Shares Value
- ------------------------------------------------------------------------------------------------------------------------------------
Shares sold ......................................... 505,849 $ 7,844,256 1,173,527 $17,013,634
Shares issued in reinvestment of distribution........ 81,339 1,271,330 20,938 311,143
Shares redeemed...................................... (516,994) (7,530,063) (290,812) (4,282,933)
-------- ---------- -------- ----------
Net increase......................................... 70,194 $ 1,585,523 903,653 $13,041,844
====== =========== ======= ===========
</FN>
</TABLE>
See accompanying Notes to Financial Statements.
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<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
For a capital share outstanding throughout each period
- ------------------------------------------------------------------------------------------------------------------------------------
Year Year September 29, 1995*
Ended Ended through
August 31, 1998 August 31, 1997 August 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period....................... $15.76 $13.57 $12.00
------ ------ ------
Income from investment operations:
Net investment income (loss)......................... 0.01 0.05 (0.09)
Net realized and unrealized (loss) gain on investments (4.31) 2.41 1.72
----- ---- ----
Total from investment operations........................... (4.30) 2.46 1.63
----- ---- ----
Less distributions:
From net capital gains............................... (0.61) (0.27) (0.06)
----- ----- -----
Net asset value, end of period............................. $10.85 $15.76 $13.57
====== ====== ======
Total return............................................... (28.46)% 18.22% 13.67%
Ratios/supplemental data:
Net assets, end of period (millions)....................... $ 21.7 $ 30.5 $ 14.0
Ratio of expenses to average net assets:
Before expense reimbursement**......................... 2.13% 2.24% 2.95%+
After expense reimbursement**........................ 2.00% 2.00% 2.00%+
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement......................... (0.06)% (0.13)% (2.14)%+
After expense reimbursement**........................ 0.08% 0.11% (1.19)%+
Portfolio turnover rate.................................... 44.09% 21.94% 20.56%
<FN>
*Commencement of operations.
+Annualized.
**Excludes 0.15%. 0.06%, and 0.00% respectively, from dividends paid on
securities sold short that are not expenses subject to expense reimbursement.
</FN>
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
NOTES TO FINANCIAL STATEMENTS at August 31, 1998
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION
The Lighthouse Contrarian Fund (the "Fund") is a diversified series of
shares of beneficial interest of Professionally Managed Portfolios (the
"Trust"), which is registered under the Investment Company Act of 1940 (the
"1940 Act") as an open-end management investment company. The Fund began
operations on September 29, 1995. The investment objective of the Fund is to
seek growth of capital. The Fund seeks to achieve its objective by investing
primarily in equity securities. Prior to November 12, 1997, the Fund was known
as the Lighthouse Growth Fund.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund. These policies are in conformity with generally accepted
accounting principles.
A. Security Valuation. Investments in securities traded on a national
securities exchange or included in the NASDAQ National Market System
are valued at the last reported sales price at the close of regular
trading on the last business day of the period; securities traded on
an exchange or NASDAQ for which there have been no sales and other
over-the-counter securities are valued at the last reported bid
price. Securities for which quotations are not readily available are
valued at their respective fair values as determined in good faith
by the Board of Trustees. Short-term investments are stated at cost,
which when combined with accrued interest, approximates market
value.
B. Federal Income Taxes. The Fund intends to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to
its shareholders. Therefore, no federal income tax provision is
required.
C. Security Transactions, Investment Income and Distributions. As is
common in the industry, security transactions are accounted for on
the trade date. The cost of securities owned and proceeds from
securities sold short on realized transactions are relieved on a
first-in, first-out basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
D. Deferred Organization Costs. All of the expenses incurred by the
Advisor in connection with the organization and registration of the
Fund's shares will be borne by the Fund and are being amortized to
expense on a straight-line basis over a period of five years.
E. Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements. Actual results could differ from those
estimates.
NOTE 3 - SECURITIES SOLD SHORT
Securities sold short represent obligations of the Fund to make a future
delivery of a specific security and, correspondingly, create an obligation to
purchase the security at prevailing market prices (or deliver the security, if
owned by the Fund) at the later delivery date. As a result, these short sales
create the risk that the Fund's ultimate obligation to satisfy the delivery
requirements may exceed the amount recorded in the accompanying statement of
assets and liabilities.
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
NOTES TO FINANCIAL STATEMENTS, Continued
The amount deposited with brokers for securities sold short is essentially
restricted to the extent that it serves as deposits for securities sold short.
It is the Fund's policy to continuously monitor the credit standing of the
brokers with whom it conducts business.
NOTE 4 - COMMITMENTS AND OTHER RELATED PARTY TRANSACTIONS
For the year ended August 31, 1998, Lighthouse Capital Management, Inc.
(the "Advisor") provided the Fund with investment management services under an
Investment Advisory Agreement. The Advisor furnished all investment advice,
office space, facilities, and most of the personnel needed by the Fund. As
compensation for its services, the Advisor was entitled to a monthly fee at the
annual rate of 1.25% based upon the average daily net assets of the Fund. For
the year ended August 31, 1998, the Fund incurred $398,634 in Advisory fees.
The Fund is responsible for its own operating expenses. The Advisor has
agreed to limit the Fund's total operating expenses to not more than 2.00% of
average net assets annually. Effective August 31, 1998, the Advisor agreed to
amend the expense reimbursement agreement to limit the period within which the
Advisor may recoup the above amount from the Fund to no later than August 31,
2001, and subject to the Fund's ability to effect such reimbursement and remain
in compliance with applicable expense limitations. In addition, the possible
recoupment period of any expense reimbursements in each year subsequent to 1998
will be limited to three years from the year of the reimbursement, and subject
to the Fund's ability to effect such reimbursement and remain in compliance with
applicable expense limitations. For the year ended August 31, 1998, the Advisor
reimbursed the Fund in the amount of $41,466. As of August 31, 1998, the
cumulative expense reimbursement from the Advisor to the Fund is $160,380.
Investment Company Administration Corporation (the "Administrator") acts
as the Fund's Administrator under an Administration Agreement. The Administrator
prepares various federal and state regulatory filings, reports and returns for
the Fund; prepares reports and materials to be supplied to the trustees;
monitors the activities of the Fund's custodian, transfer agent and accountants;
coordinates the preparation and payment of Fund expenses and reviews the Fund's
expense accruals. For its services, the Administrator receives a monthly fee at
the following annual rate:
Under $15 million $30,000
$15 to $50 million 0.20% of average daily net assets
$50 to $100 million 0.15% of average daily net assets
$100 to $150 million 0.10% of average daily net assets
Over $150 million 0.05% of average daily net assets.
For the year ended August 31, 1998, the Fund incurred $63,781 in
Administration fees.
First Fund Distributors, Inc. (the "Distributor") acts as the Fund's
principal underwriter in a continuous public offering of the Fund's shares. The
Distributor is an affiliate of the Administrator.
Certain officers and trustees of the Trust are also officers and/or
directors of the Administrator and the Distributor.
NOTE 5 - DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan (the "Plan"), in accordance with
Rule 12b-1, under the 1940 Act. The Plan provides that the Fund will pay a fee
to the Advisor as Distribution Coordinator at an annual rate of up to 0.25% of
the average
<PAGE>
LIGHTHOUSE CONTRARIAN FUND
NOTES TO FINANCIAL STATEMENTS, Continued
daily net assets of the Fund. The Plan allows that approved excess distribution
costs can be resubmitted by the Distribution Coordinator in the future years, up
to a maximum of three subsequent fiscal years following initial submission. No
such excess costs were incurred during the current period ended. The Fund paid
$79,726 in distribution costs to the Advisor as the appointed Distribution
Coordinator for the year ended August 31, 1998.
NOTE 6 - PURCHASES AND SALES OF SECURITIES
The cost of purchases and the proceeds from sales of securities, other
than short-term investments, were $15,986,897 and $15,797,685, respectively.
Purchased options transactions during the year ended August 31, 1998 are
summarized as follows:
<TABLE>
Put Options Purchased
<S> <C>
Options outstanding, beginning of year.................................. $ 841,598
Options purchased....................................................... 4,836,683
Options closed.......................................................... (3,159,400)
Options exercised....................................................... (565,864)
Options expired......................................................... (880,130)
--------
Options outstanding at August 31, 1998.................................. 1,072,887
Unrealized appreciation at August 31, 1998.............................. 1,465,663
---------
Market value of options at August 31, 1998.............................. $ 2,538,550
===========
Average fair market value of options for the year ended August 31, 1998. $ 1,361,824
===========
Net trading losses on options for the year ended August 31, 1998....... $(1,378,054)
===========
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
- -------------------------------------------------------------------------------
To the Shareholders of
Lighthouse Contrarian Fund and
the Board of Trustees of
Professionally Managed Portfolios
We have audited the accompanying statement of assets and liabilities of
Lighthouse Contrarian Fund (the Fund), (one of the portfolios constituting
Professionally Managed Portfolios), including the schedule of investments, as of
August 31, 1998, and the related statements of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the two years in the
period then ended and for the period from September 29, 1995 (commencement of
operations) to August 31, 1996. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1998, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Lighthouse Contrarian Fund as of August 31, 1998, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the two years
in the period then ended and for the period from September 29, 1995
(commencement of operations) to August 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
September 30, 1998
<PAGE>
Advisor
LIGHTHOUSE CAPITAL MANAGEMENT, INC.
10000 Memorial Drive, Suite 660
Houston, Texas 77024
(713) 688-6881
Account Inquiries (800) 282-2340
Distributor
FIRST FUND DISTRIBUTORS, INC.
4455 East Camelback Road, Suite 261E
Phoenix, Arizona 85018
Custodian
STAR BANK, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
Transfer and Dividend Disbursing Agent
AMERICAN DATA SERVICES, INC.
P.O. Box 5536
Hauppauge, New York 11788-0132
Auditors
ERNST & YOUNG LLP
515 South Flower Street
Los Angeles, California 90071
Legal Counsel
PAUL, HASTINGS, JANOFSKY & WALKER LLP
345 California Street, 29th Floor
San Francisco, California 94104
This report is intended for shareholders of the Fund and may not be used as
sales literature unless preceded or accompanied by a current prospectus.
Past performance results shown in this report should not be considered a
representation of future performance. Share price and returns will fluctuate
so that shares, when redeemed, may be worth more or less than their original
cost. Statements and other information herein are dated and are subject to
change.
